How to set up a tenancy

Last updated: 19 July 2018

After a lot of hard work, your property is ready and the tenants have been found. Now all that stands between you and getting that first month's rent in the bank is… a big pile of pretty dull paperwork.

Dull, but very important. From the many legal and professional experts I've spoken to, it seems like a good 90% of landlords' woes are to some degree self-inflicted: even if it's the tenant being troublesome, the situation would be much easier to deal with if the landlord had set everything up correctly in the first place.

What is a tenancy?

Under UK law, a tenancy is automatically created whenever somebody moves into a property and starts paying rent. Even if there's no paperwork at all, the occupant still becomes a tenant – which means they have certain legal rights that are difficult to remove.

In England and Wales, the default type of tenancy that's created is called an assured shorthold tenancy (AST). That's good news, because an AST gives landlords a clear-cut process to end the tenancy under particular circumstances.

An AST can't be created for holiday lets, lodger arrangements, where the tenant is a company, and a few other unusual scenarios. Also, in Scotland, the current system is slightly different and it will soon be changing to a completely different system – so look for specific guidance if any of this applies to you.

Even though a tenancy is created automatically, you should still have a written tenancy agreement. Without one, there's no evidence about when the tenant moved in, how much rent they should be paying, or anything else. All disputes come down to he-said-she-said, and it will be very difficult to get help from the courts if you need it.

A tenancy agreement, then, is the first of the documents you'll need to set up a tenancy. But it's by no means the only one…

What should go in a tenancy agreement?

A good tenancy agreement is useful for three reasons:

It clearly sets out what’s expected of both parties.

It provides the correct legal footing to start, maintain and end the tenancy.

It serves as a reference throughout the tenancy to see what should happen in certain situations.

While it's possible to cram an entire tenancy agreement onto a single page, a good tenancy agreement can easily run to 10+ pages. It goes into everything the tenant should and shouldn't do (with a smaller section on what the landlord will and won't do), so – in theory – whatever situation crops up, both parties can turn to the tenancy agreement to see what's been agreed.

I get into masses of detail about tenancy agreements in my book How To Be A Landlord, including lots of useful clauses we use at my letting agency to save our landlords from all manner of hassle.

You'll find tenancy agreements floating around on the internet, but be very careful: laws change, and you could find yourself accidentally using an outdated document. (I've also seen landlords unwittingly using New Zealand tenancy agreements because they just did a search online and didn't check properly.)

Whichever you use, don't just print it off and use it as-is: read through to make sure it reflects how you want things to work, and add in any additional clauses specific to your situation.

Drawing up an inventory

Without an inventory, you’ll have a hard time making any deductions from your tenant’s deposit when they move out, because you won’t have a record of the state the property was in at the start.

A good inventory will specify the exact condition of every internal element of the property, along with photographic evidence. There's nothing stopping you from drawing up the inventory yourself, but it's probably a good idea to use a professional: they'll do a better job, and they're clearly neutral in the event of a dispute.

The inventory should take place just before the tenant moves in (or moves any of their possessions in), and the tenant should be given a copy at the check-in. They should be given a reasonable period of time to review it, then raise any points of disagreement or sign to indicate their acceptance.

Protecting the deposit

Chances are you want to take a deposit from the tenant to cover you against any damage or missed rent. The way you handle the deposit is very important: you must protect it correctly, and give the tenant the information that's required by law. If you don't do both these things, you could be fined up to three times the value of the deposit you took.

There are three approved deposit protection schemes, and you must register the deposit with one of them within 30 days of receiving it:

All three of the services offer an insurance-backed scheme, which means that you don’t have to physically pay the deposit over to them – you just make them aware of the deposit’s existence and keep it in your own bank account for the duration of the tenancy. The DPS and mydeposits also offer a custodial scheme, where you actually transfer the deposit into their bank account.

Whichever you choose, follow the guidance on the scheme's website to find out what you're meant to do.

Here's the important part that lots of landlords miss: your job isn't finished when you protect the deposit. You must also issue the tenant with “prescribed information” about how the deposit is being handled (and have them sign it), and give them a copy of the T&Cs of your chosen scheme.

Neither of these is difficult – the scheme you choose will make this information available to you – but lots of landlords don't realise they have to pass it to the tenant, and therefore leave themselves open to a fine.

So in summary, correctly protecting a deposit means that you’ve:

Registered the deposit with one of the three services

Given the tenant the prescribed information and had them sign it

Also given them the service’s leaflet for tenants with the full terms and conditions

It's important not only to supply all these documents, but to be able to prove that you have. As well as having the tenancy agreement signed directly, the easiest way to prove everything else is to put together a tick sheet of everything you're supplying, and have the tenant sign that sheet to acknowledge receipt.

Conclusion

So once you've got the first month's rent and the deposit cleared in your bank account, and the tenant has signed to acknowledge the receipt of all that paperwork, you can finally hand over the keys and let the tenant move in.

It seems like there's a lot to do, but it's not so bad when you get used to it: the best thing to do is to put together a checklist you can work from for each new tenancy, to make sure you don't forget anything that could come back to bite you later.

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